Month: August 2016

The latest data on the Irish labour market, from the Quarterly National Household Survey (QNHS) in q2, shows that employment is stronger than generally thought, but that the labour force is also growing rapidly again, boosted by a return to net immigration, with the result that the numbers unemployed actually rose marginally, keeping the unemployment rate unchanged over the first half of the year.

Employment has been growing steadily now for some time and the second quarter saw an acceleration, with the numbers at work rising by a seasonally adjusted 20,000, following a 16,000 rise in q1. That increase brought the annual rise to 56,000, or 2.9%, and the seasonally adjusted employment figure above two million for the first time since early 2009. Over the past year most industries have created jobs, notably construction ( 11,000) and manufacturing (9,000), although there was some modest job losses in financial services and (surprisingly) professional and scientific services.

The labour force in Ireland contracted sharply during the recession and has been slow to recover, although that now appears to be changing, with a 22,000 rise in q2, bringing the annual increase to some 33,000. The participation rate has picked up but a big factor in Ireland’s case is migration. We now know from the 2016 census that net emigration since 2011 was much lower than thought, and the CSO’s latest estimates show a return to net immigration in the year to April 2016. Emigration is still high , at 76,000, but immigation has picked up, to 79,000, giving a net 3k inflow. Most immigrants are still from outside the EU (32,000) but the past year has seen a rise in returning Irish migrants, with a 10,000 increase to 21,000.

The CSO publishes a monthly unemployment figure which is often revised following the QNHS release, and that is indeed the case on this occasion. The unemployment rate has been revised down in q2, to 8.4% from 8.7%, but that is now unchanged from the first quarter, with the numbers unemployed now revised up. Indeed, the unemployment figure in the second quarter, at 183,000, is actually 1500 higher than in q1.

Overall, the figures indicate that the economy is in better shape than indicated by the first quarter GDP figure ( which showed a contraction) and that household incomes are being supported by strong employment growth. Yet they also highlight an issue we have consistently flagged of late- the growing signs of significant capacity constraints. Migration has turned positive again, population growth has picked up and the labour market has tightened, putting pressure on existing resources in housing, health , education and the infrastructure. There is a clear case then for additional government spending in these areas, particularly when the cost of borrowing is so low, yet existing fiscal rules mean that the State’s room for manoevre is limited.

Mortgage lending is generally driven on the demand side by demographics, household income, mortgage rates and expectations about house prices, which implies that demand in Ireland should be growing strongly given that all these factors are supportive. On the supply side, the number of institutions able and willing to supply housing loans in Ireland has fallen, but the remaining players are in much better shape than they were , and keen to offset debt repayment, which is putting ongoing downward pressure on their assets. So we have a ‘mortgage war’ of sorts, with strong competition among a limited number of players.

The number of new loans for house purchase did rise strongly in 2014, albeit from very low levels, increasing by 50%, to just over 20,000. The BPFI has revised the 2015 data down but the year still saw another strong rise, to 23,664 , although there was a significant slowdown in the second half, culminating in a year over year fall in the final quarter. That change in trend presumably reflected the Central bank’s new controls on Loan to Value and Loan to Income, introduced in late January of that year, and the first quarter of 2016 saw a much sharper annual decline, of 9.4%. The approvals data then pointed to some recovery in the second quarter and the number of drawdowns for house purchase did indeed pick up on an annual basis, by 6% to 5767, albeit flattered by the downward revision to 2015. However, the total for the first half of 2016, at 10,401,is still slightly down on the same period of 2015 (10,550) although indicating some stabilization. The lending data is seasonal so comparisons with the previous quarter are not that meaningful; indeed, on our seasonally adjusted model lending in q2 was actually weaker than in the first quarter.

One unusual feature of mortgage lending in recent years is that it appears to account for only around 50% of housing transactions, and the available data shows that still to be the case in 2016. According to the Property Price Register there were over 20,800 residential transactions to end-June, which given the mortgage figure of 10,401 still implies only a 50% share for transactions funded by domestic mortgage providers.

The value of new lending for house purchase showed much stronger growth in q2 ( 14%) and at €2.bn for the half-year is actually slightly ahead of the same period in 2015. Even at a constant Loan to Value the average loan will rise in an environment of rising house prices and the second quarter saw the average new mortgage for house purchase rise by 7.7% to just under €198,000 , the highest figure in five years. Other forms of mortgage lending (top-ups and re-mortgaging) are growing again, with the result that the value of total mortgage lending rose by 18% in q2, and amounted to €2.3bn for the first half of the year. For 2016 as a whole we expect the latter to emerge at €5.2bn or some €400mn ahead of 2015, and the figure for house purchase at €4.7bn, with broadly flat numbers for house purchase offset by a rise in the average mortgage.

With all the hullabaloo surrounding Ireland’s 2015 national accounts the data for the first quarter of the year received less attention than normal. To recap, Irish GDP fell by 2.1% in q1,with large falls in exports, investment, imports and inventories, offsetting increases in personal consumption and government spending. A recession is generally defined in terms of two successive quarterly contractions in GDP, and the available data raises the possibility that Irish GDP may indeed have fallen again in q2, although as we know the national accounts can throw up the strangest results so it is impossible to be definitive.

What is clear is that absent revisions the volume of retail sales fell in the second quarter and by a chunky 2.7%. Core sales rose, by 1%, so the decline was strongly affected by a fall-off in car sales ahead of the new registrations in July, but it is the total that impacts overall consumption, which in general has been weaker than indicated by the trend in retail sales.

It is also noteworthy that VAT receipts have been weaker than expected in recent months; the latest exchequer figures, to end-July, showed annual growth in VAT at 4.2%, against an end-year target of 7.7%. Relative to profile, VAT receipts are €292mn behind, or 3.5%. Income tax is exactly on target and although total receipts are still ahead of profile, the €650mn excess largely reflects a €483mn overshoot in corporation tax , which is not reflective of anything going on in the Irish economy. If one excludes corporation tax, receipts are €164mn ahead of profile, or 0.7%.

There also appears to be something unusual happening in the labour market. The Irish unemployment rate has been on a steady downward trend for the past four years, declining from over 15% to below 8%, but in the three months to July the rate was unchanged at 7.8%, with July alone seeing the actual numbers unemployed unchanged. Again, data revisions can change that picture and the labour force may be growing more rapidly than thought but on the face of it the steady fall in unemployment has stalled.

The GDP figure in the national accounts is dominated by external trade and we do not know what will emerge when the estimates are released in September. The available merchandise data shows exports weakening, with annual growth turning negative in the three months to May. The decline in imports is even more pronounced, implying that investment spending has also continued to fall. The industrial production figures available to May also point to a fall in output in q2 while the CSO’s index of services output was flat in the second quarter.

The Brexit vote is generally seen to be negative for Ireland in the short term but the above raises the possibility that the economy may have contracted in q2 anyway and is therefore already in recession.